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Modern Monetary Rules: Any Role for Financial Targeting?

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons

ISBN: 978-1-78441-780-2, eISBN: 978-1-78441-779-6

ISSN: 1571-0386

Publication date: 1 July 2015

Abstract

We test the determinacy properties of the standard and financial-sector-augmented Taylor rules in a new Keynesian model with a presence of banking activities. We extend the basic fully rational environment to the setting with heterogeneous expectations. We observe that the benefits from extra financial targeting are limited. Financial targeting, if well designed, can compensate for the improper output-gap targeting through the financial-production channel. The analysis demonstrates however possible threats resulting from the misspecification of the augmented rule. A determinate mix of output-gap and inflation weights can turn indeterminate if compensated by too extreme financial targeting. The results are robust to the presence of heterogeneous expectations.

Keywords

Citation

Wolski, M. (2015), "Modern Monetary Rules: Any Role for Financial Targeting? ", Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons (International Symposia in Economic Theory and Econometrics, Vol. 24), Emerald Group Publishing Limited, Bingley, pp. 367-403. https://doi.org/10.1108/S1571-038620150000024022

Publisher

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Emerald Group Publishing Limited

Copyright © 2015 Emerald Group Publishing Limited